Linkages among interest rates in the United States, Germany and Norway

The Johansen multivariate cointegration methodology is used to analyze rela tionships among short-term and long-term interest rates in the United State s, Germany and Norway. A variance decomposition approach is applied to esti mate the proportion of each interest rate's forecast error variance attribu table to innovations in the other interest rates. Impulse response function s are plotted to illustrate the speed with which interest rate events are t ransmitted between capital markets. The analyses illustrate that US interes t rates have a significant influence on both German and Norwegian interest rates, while the reverse effect is modest. Norway is also strongly exposed to German interest rate movements, which reflects the consequences of a sma ll country linking its currency to the value of European currencies.